How the President's Health Care Plan Would Expand InsuranceCoverage to the Uninsured

Millions of Americans are without health
insurance. As a result, these individuals and their families too
often find that their access to vital health care services is
compromised while American taxpayers bear the burden of paying the
costs. President George W. Bush has proposed a number of positive
policy initiatives that can reverse this situation and make health
care coverage more affordable for millions of individuals and
families.

A Diverse and Dynamic Uninsured
Population

According to the U.S. Bureau of the
Census, 41.2 million Americans did not have health insurance
coverage in 2001.1
Roughly half of the members of this diverse population are
uninsured for a period of six months or less, and about 40 percent
are uninsured for a period of 18 months or more.2

The
overwhelming majority of the uninsured are young, between the ages
of 18 and 34; over 80 percent are part of a working family.3 They tend to be
employed in small businesses and are concentrated in wholesale and
retail trade industries as well as in agricultural, forestry,
fishing, mining, and construction.4 They are disproportionately minorities,
largely Hispanic.5
While a substantial majority of these Americans are low-income
working people, the fastest growing portion is comprised of
middle-income to upper-middle-income families.6

Although the majority of Americans have
health care coverage through their place of work, lower-income
working Americans are less likely to have employer-sponsored
coverage.7 Yet
Americans get unlimited tax relief for the purchase of health
insurance if--and only if--coverage is provided through their
employer. In 2000, the tax subsidy linked to employer-sponsored
coverage was estimated to be $126 billion.8

Lower-income working Americans who do not
or cannot get health insurance at their place of work have few
choices; they can either purchase non-group coverage outside of the
place of work (and do so with after-tax dollars) or go without
coverage altogether. Health care economists concluded long ago that
this health care tax policy is inequitable and inefficient, and
that it distorts the insurance markets and contributes
significantly to the number of the uninsured in the United
States.9

Policymakers should also consider the
"cost" of the uninsured to the public--including the costs of
government payments and programs and other public spending for
health care. In a recent research paper, Urban Institute analysts
Jack Hadley and John Holohan estimate that, in 2001 dollars, the
public paid $35 billion in uncompensated care and that $30.6
billion of this payment was in the form of government spending.10 As Hadley and Holohan
explain:

We...estimated that governments finance
most of the uncompensated care received by the uninsured, spending
about $30.6 billion on payments and programs largely justified to
serve the uninsured and covering possibly as much as 80-85 percent
of the uncompensated care costs through a maze of grants, direct
provision programs, tax appropriations, and Medicare and Medicaid
payment additions. Most of this money comes from the federal
government, primarily through Medicare and Medicaid, followed by
state/local tax appropriations for hospitals, Medicaid DSH and UPL
payments, and VA's direct care programs.11

Replacing this inefficient and messy
system with direct assistance to the uninsured would be both
simpler and more cost-effective.

The President's Plan to Expand Coverage and
Choice

President Bush is proposing changes to
address the needs of America's uninsured by fixing the inequities
of the current system and mainstreaming uninsured individuals and
families into the private insurance market. While liberal
policymakers would like to enroll the uninsured in public programs
such as Medicaid (which are, even now, overwhelmed and
underperforming), available survey research shows that Americans
prefer to have private health coverage rather than government-run
public programs.12 To
achieve this objective, the Bush Administration would create a new
system of tax credits for health care coverage that targets
low-income individuals and families who do not have
employer-provided coverage.

In
addition, President Bush has put forward a series of policy changes
aimed at improving existing health care accounts. These policy
recommendations would enable individuals and families to control
decisions regarding their own health care and decide for themselves
how best to spend their health care dollars.

The
President's proposals to expand coverage and return personal choice
and control to individuals and families include the resubmission of
a system of tax credits, targeting individuals and families who do
not get health insurance through the workplace; allowing the
carryover of existing flexible spending arrangements (FSAs) to
enable individuals and families to build up savings for health care
expenses; and the elimination of statutory restrictions on medical
savings accounts (MSAs).

Health Care Tax
CreditsThe President is resubmitting an $89 billion health care
tax credit proposal to assist millions of Americans who are without
health insurance provided through the workplace. The health care
tax credit would provide a subsidy of up to 90 percent of the cost
of a health insurance premium, up to a dollar amount of $1,000 per
person and $3,000 per family. Families with an adjusted gross
income of $25,000 or lower would be eligible for the maximum credit
of $3,000. For families with incomes above $25,000, the size of the
credit would vary with income and would be phased out at income
levels of $30,000 for an individual with no dependents and $60,000
for families with children.13

In
its structure, the proposed Bush tax credit would be refundable,
meaning that low-income individuals and families who owe minimal or
no taxes would still receive a direct subsidy for the purchase of
health insurance. It would also be "advanceable," meaning that
individuals or families would get the assistance at the time
premium payment is due and not have to wait until the end of the
year for reimbursement.

The
Bush tax credit proposal outlines a new role for the states, both
in building an infrastructure that incorporates choice and
competition and in providing additional subsidies for low-income
Americans. Under the terms of the original Bush tax credit proposal
outlined last year, a person could purchase individual health
insurance with the tax credit; under the terms of the revised
version, in addition to options in the non-group market, a person
could purchase health insurance through private-sector purchasing
pools, state-sponsored insurance-purchasing pools, and state
high-risk pools.14
These state purchasing arrangements are similar to those extended
to states under the Trade Adjustment and Assistance (TAA) Act.15

At
the discretion of state authorities, after December 31, 2004,
individuals and families who would not otherwise be eligible for
public assistance could receive a federal tax credit to buy into
certain state-sponsored purchasing groups where private insurance
is offered or to buy into state government employee
health-purchasing groups.16 Moreover, states could supplement the
federal tax credits used for group purchasing of private health
plans with additional state contributions. Under the terms of the
Bush proposal, states could make an additional contribution of up
to $2,000 per adult for those with incomes at 133 percent of the
poverty level; this contribution would be phased down to $500 per
adult for those with incomes that are 200 percent of the poverty
level.17

Health Care
AccountsBeyond the tax credit proposals, the Bush Administration
has unveiled a broad range of policy improvements to make health
care coverage more affordable by giving individuals greater control
of their health care spending. In 2002, the U.S. Department of the
Treasury issued a ruling to clarify the status of health
reimbursement arrangements (HRAs). Through these arrangements,
employers could offer employees a health plan in combination with a
tax-free spending account for health care expenses, allowing any
unspent funds to be carried over from year to year, tax-free.18

Beyond this administrative change in the
system, the Bush Administration is also proposing statutory changes
that would expand and improve Archer MSAs and FSAs.19 Changes in Archer
MSAs are particularly significant, given that nearly 73 percent of
MSA enrollees were previously uninsured.20

Flexible
Spending ArrangementsUnder current law, employees can participate in
employer-based flexible spending arrangements, through which
employees can set aside a portion of their salaries in a special,
pre-tax account to use for anticipated qualified health care
expenses. If employees do not use the funds they have set aside in
their FSA by the end of the year, however, they lose them. They may
not carry over any unused funds to the following year. Under the
Bush proposal, employees could carry forward up to $500 of unused
funds in their FSAs tax-free every year for medical expenses.

Medical Savings
AccountsToday, some Americans are permitted to open medical
savings accounts from which individuals and families can pay for
their medical expenses. These accounts are tax-free and can be
rolled over from year to year. Under current law, no more than
750,000 individuals can have a medical savings account, and the MSA
demonstration is scheduled to end after December 31, 2003.21 These stipulations
are both a profound restriction on the health insurance market and
a legal impediment designed to discourage the growth of such
plans.

In
addition to these restrictions, there are a number of statutory and
regulatory restrictions that determine how such accounts may be
used. For example, under current law, an MSA must be coupled with a
high-deductible health plan. The law specifically defines a
high-deductible plan as one that has "deductible(s) in the range of
$1,700 to $2,500 in the case of individual coverage, and $3,350 to
$5,050 in other coverage arrangements, with out-of-pocket limits
set at $3,350 for individual coverage and $6,150 in "all other
cases."22

The
Bush proposal would eliminate the artificial participation cap on
MSAs and make the demonstration permanent. These changes would
remove market disincentives and allow supply to meet market demand.
The Bush proposal would open up the MSA option to any individual
who wanted one (with the exception of those who would otherwise be
eligible for a refundable tax credit) and change the definition of
a "high-deductible" plan to any plan with an annual deductible as
low as $1,000 for an individual and $2,000 for family or other
coverage, with an additional provision to encourage preventive
medical services. In addition, it would allow both employers and
employees to contribute to the account and would permit
contributions up to 100 percent of the annual deductible.23

Making the President's Proposals
Better

The
problems of the uninsured reflect a broader problem of the health
care system--the current federal and state tax treatment of health
insurance. The current system undermines the portability of
insurance, inhibits personal ownership and control of health plans,
prohibits genuine consumer choice, and obstructs the functions of
the market. Heritage Foundation health policy analysts have long
championed a comprehensive and universal reform of America's health
care system and have recommended replacing the existing federal and
state tax structure for health insurance with a national system of
tax credits.24

Short of such a comprehensive reform,
President Bush's health care policy agenda is laudably ambitious.
It would make health care coverage more affordable and would help
millions of Americans secure health insurance coverage. The
President's policy would ensure the expansion and availability of
private health insurance coverage for individuals and families.

Congress should work with the Bush
Administration to make further improvements in health care policy.
Specifically, Congress should:

Permit states to
determine the level of tax credit supplement and allow employers to
contribute. As described above, the Bush proposal allows
states to supplement the federal tax credit. However, there are
limits regarding the amount that states may contribute and whom
they may assist. States should have the flexibility to leverage all
available resources to enhance the federal tax credit as they see
fit for their residents. Furthermore, for employees who are not
receiving employer-sponsored coverage, regulatory policy should be
amended to permit employers to make a contribution on behalf of
their employees.

Provide a
partial tax credit for employer-sponsored health
insurance. While a number of uninsured workers do not have
access to employer-sponsored coverage, there are those who simply
decline employer coverage due to cost.25 Furthermore, those insured low-income
families who make a financial commitment to get insurance through
their employer would not be eligible for assistance. Therefore, to
promote equity, certain income-eligible individuals should be able
to receive a partial tax credit that can be applied to an
employer-sponsored policy. Such a policy could also encourage some
small businesses to offer coverage. According to a recent survey,
"75 percent of uninsured small employers said that they would
consider offering a health plan if the government provided tax
credits to workers to help them pay for coverage."26 Senator James
Jeffords (I-VT) incorporated such an approach in legislation
introduced in the 107th Congress.27

Expand the FSA
carryover to include all unused funds. There should be no
limit to the carryover amount of unused FSA funds. Monies
contributed to an FSA are set aside from the employee's earned
wages. It is the employee's money; therefore, any unspent dollars
in the account should be carried over year to year. Instead of
simply anticipating planned annual medical expenses, workers would
also be able to save for future, unexpected, or uncovered
services.

Establish
individual ownership of HRAs. Currently, employers control
health reimbursement arrangements, including the accounts. While
employees are able to carry over unspent funds from the account
year to year, when an employee leaves his or her job, the employer
controls the account funds. Some employers have decided to allow
their employees access to any remaining funds in the accounts after
they leave. However, if an employer chooses not to do so, there is
little incentive for an employee not to "spend down" the funds in
the account before separating from the company. A better solution
would be to give employees control and ownership of these accounts
so that, upon their departure, they would be able to maintain the
HRA policy on their own and continue to have full access to the
account.

Expand the use
of re-employment accounts for health care-related
expenditures. President Bush has proposed establishing
re-employment accounts for certain unemployed workers. These
accounts would be worth up to $3,000 and could be used to purchase
training and supportive services.28 Since most workers lose their health
insurance when they lose their jobs, unemployed workers should also
be allowed to use the funds in these re-employment accounts to
assist with health care-related costs, including premium payments
on a health insurance policy, during their period of
unemployment.

CONCLUSION

The
President has laid out an ambitious health care policy agenda that
includes substantial revisions in the federal tax code and the
federal tax treatment of health insurance. These tax changes would
broaden access to private health insurance coverage, establish
equity in the treatment of health insurance, and improve the
overall function of the private health insurance market by
incorporating consumer choice and market competition.

The
President's proposals establish a high bar for success. With the
help and support of Congress, the bar can be reached--and, in some
cases, raised even higher.

Nina Owcharenko is Health Care Policy Analyst
in, and Robert E. Moffit, Ph.D., is Director of, the Center for
Health Policy Studies at The Heritage Foundation.

2."A Revolving Door: How
Individuals Move in and out of Health Insurance Coverage,"
University of Michigan, Economic Research Initiative on the
Uninsured, ERIU Research Highlight No. 1, October 2002, p. 1.

3.Paul Frostin, "Sources
of Health Insurance and Characteristics of the Uninsured: Analysis
of the March 2002 Census Population Survey," Employee Benefit
Research Institute Issue Brief No. 252, December 2002, pp. 20,
11.

10.See Jack Hadley and
John Holohan, "How Much Medical Care Do the Uninsured Use, and Who
Pays for It?" Health Affairs, February 12, 2003, at
http://www.healthaffairs.org/WebExclusives/Hadley_Web_
Excl_021203.htm.

13.U.S. Department of the
Treasury, General Explanations of the Administration's Fiscal Year
2004 Revenue Proposals, February 2003, pp. 45-47. Cited hereafter
as General Explanations.

14.Ibid., p. 47.

15.See Nina Owcharenko and
Edmund Haislmaier, "State Opportunities to Provide Affordable
Health Coverage Under the Trade Law," Heritage Foundation
Backgrounder No. 1626, February 25, 2003. Public Law 107-210, H.R.
3009, included provisions to provide both workers who lost their
jobs in part because of expanded international trade and certain
other individuals a refundable, advanceable health care tax credit
worth 65 percent of the premium to assist them in securing health
care coverage. These tax credits could be used only for a select
group of coverage options, which included state-sponsored
purchasing pools.

16.General Explanations,
p. 47.

17.Ibid. Under the Bush
proposal, persons with incomes in excess of 200 percent of the
poverty level would not be eligible for additional state subsidies
or refundable tax credits.

18.Press release,
"Treasury and IRS Guidance on Health Reimbursement," U.S.
Department of the Treasury, June 26, 2002, at
http://www.treas.gov/press/releases/po3204.htm.

19.White House, "The
President's Proposals for Health Security in the World's Best
Health Care System," at
http://www.whitehouse.gov/infocus/medicare/health-care/health-accts.html.

23.Ibid., p. 55. Under the
Bush proposal, preventive health care services would get an
additional incentive: "Such plans would be...permitted to provide,
without counting against the deductible, up to $100 of coverage for
allowable preventive services per covered individual each
year."

26.BlueCross BlueShield
Association, "The Uninsured in America," p. 11, referring to the
2002 Small Employer Health Benefit Survey conducted by the
BlueCross BlueShield Association, the Consumer Education Council,
and the Employee Benefit Research Institute.

27.For further detail, see
S. 590, the Relief, Equity, Access, and Coverage for Health (REACH)
Act, at www.thomas.loc.

28.Executive Office of the
President, Office of Management and Budget, The Budget for Fiscal
Year 2004, p. 199.